CFOs and corporate treasurers looking to find investments with strong yields have been out of luck for quite some time. The financial crisis and changes in the global financial market as well as within governments themselves have created a lot of opportunity for low-rate investments.
These low-rate investments aren’t exactly what someone is looking for when it comes to using the cash in America’s corporate coffers. Recent news reported on by Danielle Robinson for the International Financing Review shows that “companies such as Google are being forced by the Federal Reserve’s low-rate policy to invest in ever-riskier credit products.” Among these are longer time period bonds as well as “junk bonds and leveraged loans.”
The typical sources for corporate investments due to the Fed’s low rates are not providing significant yields and thus companies like Google, Microsoft, Apple, and many other high-cash firms are reacting by utilizing some higher-risk higher-reward products.
Danielle continues, writing that “going into higher risk corporate bonds and loans is a new phenomenon for corporate treasurers.” These treasurers usually are focused on high quality bonds and “in maturities typically no longer than three years.” But over the past few years these go-to bonds and loans are returning significantly lower yields.
This is unfortunate as US companies are sitting on vast amounts of cash. The lack of any high quality bonds or loans with good yields is keeping them from making large acquisitions or taking advantage of other opportunities. Many fund managers are finding that “leveraged loans are looking more attractive than high-yield bonds.” Certainly different then ten years ago.
It’s hard to say how long this pattern will continue for corporate treasurers and the market in general. For the foreseeable future though, the problem is likely to continue. Executives will be on the lookout for any changes the Fed makes in the future to see if the typical bonds return to a more profitable level.
Is your company looking for better yields on its bonds, investments, or loans?